USD/CHF bounced off two-year highs: What’s next?

The US dollar failed to hold gains above 1.0200 Swiss Francs last week, retracing to local support levels before the Federal Reserve’s meeting and rate decision. Investors did not expect the Federal Open Market Committee to make a move on the interest rates this Wednesday. However, recent macroeconomic data could not be ignored by the regulator and traders wondered whether the Fed would announce more tightening of the financial conditions this year or not. Jerome Powell expressed a limited optimism on the economic growth, underlining robust pace in the labour market and trade balance. However, the lack of progress in the inflationary pressure left Powell without any justification to raise the interest rates at least in the nearest future. Fed Chairman suggested that inflation will come back to the target range of 2% later this year and that this effect is just a temporary factor. Investors comprehended those statements as hawkish comments and rebought the US dollar, despite the recent retracement. We’ll try to figure out how far this trend can go.

Swiss Franc’s traditional role is the safe-haven currency as many world’s wealthy people prefer holding long-term investments and savings in Swiss Banks. That’s just a historical fact, and nothing can fight that as Swiss Banking system is the most reliable in the world, while customers’ protection remains at the highest levels. Those capital inflows used to support Swiss economy since World War II despite several new financial capitals appeared on the map. However, USD/CHF kept gaining strength recently, confirming the same tendency in other safe-haven assets such as US 10-year Treasury Bonds and gold. Although concerns on global trade tensions and economic growth keep weighing on investors’ sentiment, and several emerging markets cannot find a sustainable pace of growth, the overall tendency remains in favour of global equities. For instance, US stock indices had just re-wrote historical highs, showing that the risk appetite is still strong, despite expensive shares’ prices.

Another reason for the greenback’s strength is related to the situation in the financial conditions and global interest rates differentials. It’s already clear that Europe is entering another recession, while several central regions might suffer the most from the economic slowdown. European Central Bank has nothing but to keep softening the financial conditions, supporting local exporters and manufacturers. Britain is in deep, long-term trouble with the Brexit saga. China’s government debt to GDP ratio exceeded 250% recently, and the state kept pumping liquidity into the financial sector, trying to refresh the economic growth. Interest rates in Japan are still negative; there is just no sense to present in the local fixed-income market. Therefore, the US is the only region to invest with relatively stable economic growth and comparatively high yields. Moreover, the US Federal Reserve is not going to listen to Donald Trump, and another rate hike might be on the table for the end of the year.

If Friday’s Non-Farm Payrolls report beat the market consensus of 186 thousand jobs added in April, then global investors and currency speculators will continue buying US dollars versus all its major peers, reflecting the disbalance of the worldwide economy and underlining the leading role of the US economy. The long-term uptrend has all chances to continue also due to the double negative balance in the United States as Treasury has nothing to continue borrowing abroad to cover holes in the trade balance and budget deficit. They have to offer higher yields than in other regions to attract the borrowing capital. Therefore, USD/CHF could get another portion of support from the fundamental side of things.

Technically speaking, the long-term bullish momentum is still active. Moreover, the bulls might accelerate the buying pressure again above 1.0250 resistance, lifting USD/CHF to historical average rates. If we looked at the weekly chart below, we’d see that the exchange rate of 1.1600 was regular 9 years ago, and the recent uptrend is nothing but recovery from the plunge in 2015. The ascending blue channel was built thanks to the support line, which used to work several times during the latest price action.

A closer picture is shown on the daily chart below. The pair charted an ascending asymmetric triangle with the current price staying just several pips below the resistance line. The latest retracement was limited by the exponential moving average with the period of 21 days (green arrow) last Wednesday, precisely during Powell’s press conference. Current quotes are well above the long-term EMA55 curve, which represents two-month average prices. Another test of the resistance trendline is unavoidable, and if the bulls were able to close a day above it, then we’ might see a breakthrough acceleration with a new target above 1.0350 and 1.0400 in extension. Therefore, buying call options for USD/CHF before the US NFP report isn’t an utterly terrible idea, even though the greenback is rather expensive recently.

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